TEN BAGGERS AND BEAR MARKETS
8 July 2008
The Australian Stock Exchange (ASX) experienced its worst financial year (FY) since 1981-1982. For overseas readers our FY’s start on July 1 and end on June 30. The press has had an absolute picnic, quoting the figures, sensationalising the figures all in the name of getting the big story out there. Those investors in companies with fragile earnings or dreams built on nothing more than debt have been decimated to say the least.
I have created a mock superhero I call “Yield Man”, and if I could picture him I am sure he would be similar to the Will Smith character Hancock. Not even the mighty yield man is going to save you when 30-50% of your capital is wiped out in the search for 6% yield. Isn’t there are saying (I refuse to Google it), that there has been no greater destruction of wealth than in the search for yield?
Ignoring my own advice I sat down on Saturday morning with a coffee and read the financial press. They advise me that I should stay out of the market, we have 20% more to fall and this bear is going to last another two years. Poor old Monica and Martin mainstream do not stand a chance against the barrage of negativity. Many have already blown up in dodgy property schemes now they are faced with watching their so-called blue chip shares slide from under them.
New investors just seem to be constantly lining up to be a part of the world’s greatest shearing shed. A bear market to me is simply some timeout required by the regulators to work out what went so horribly wrong during the bull, and how investors were fleeced.
On May 2 2008, my partner and I welcomed Lachlan James Locantro into the world. My first aim was to give my son a strong name, a name that could carry him through in business or whatever career path he chose. Another aim for any parent is to avoid having their children fitted for a green tracksuit, so this was also taken into consideration. Instead of blowing his baby bonus on a new Plasma, drugs, or depreciating assets I gave him his first taste of speculation and hopefully the longer-term ability to think outside conventional financial wisdom. To go with his limited edition Gibson Robot Guitar, I purchased shares in Ramelius Resources (RMS) 78c, Diamonex (DON) 23.5c and will probably complete the trifecta with a geothermal junior. He is in no rush for profits, and is hardly the daytrading type so I am going to let his stocks progress hopefully through a number of re-ratings, dips and shareholder bonuses. Who knows maybe he might even have a visit from “Yield Man”.
I began client advising in 1998, and being a speculators I have witnessed breathtaking bubbles, numerous corrections, but have found regardless of what the newspapers say there have been plenty of ten to fifty baggers out there for the taking. Whilst the figures say this was the worst FY since 1981-1982, a number of my clients have just experienced their most successful and the tax man cometh. This was due to being well exposed to the one of the highest grade gold hits in recent history that was announced last May by Ramelius Resources (RMS), catching the tail end of the uranium bubble, then having a junior oil explorer that we bought a 10% stake in release details of a significant oil strike in Brazil. Our emerging zinc producer Herald Resources (HER) became the subject of a takeover battle (still in progress), and instead of a normal market providing a share price of 70c, clients have sold out between $2.15 and the $2.90’s. Outside of this group the overall negativity has impacted our stocks and they have failed to respond the continual flow of good news released. I must say I am more annoyed than concerned as in the end fundamentals always come to the fore.
SPECULATIVE MARKET IN AUSTRALIA
⇒ Sentiment is still fairly positive, despite a having a mini collapse on Thursday July 3 2008. Across the board the smaller stocks were sold off, but volumes generally were on the low side.
⇒ Remember these lines from the hilarious movie Borat?
“Kazakhstan greatest country in the world. All other countries are run by little girls. Kazakhstan number one exporter of potassium. Other countries have inferior potassium”.
Who would have thought that Borat would have called one of the great speculative bubbles unfolding on the stock market? If I would have research the sector instead of choking on my popcorn I would have made an absolute killing. Often it is the ridiculous, the plain simple or totally out there that emerges from left field and creates a frenzy.
⇒ The energy sector is undergoing a resurgence and the focus now is on COAL. Speculators are going crazy for coal seam, coal to liquid, and everything coal. We now have ex resource stocks that went Dotcom/biotech, now bringing in energy projects through the back door and enjoying the spoils of amazing re-ratings.
⇒ The gold sector will be no different. In many cases the only gold some companies will see will be when Directors visit the lavatory after taking a vitamin B tablet.
⇒ Daytrading is now back in vogue, chartists are looking for breakouts and internet forums are now the place to be to push absolute rubbish into the stratosphere. The days are back when you can simply have an MOU that is going to cost a fortune to go through with on a project that will never be developed and bingo your market capitalisation is $50m+.
⇒ Following the promoters stocks can pay off, especially if you recognise the move early and are patient. We have had considerable success from purchasing the right companies that are likely targets for the other super heroes, “The Shellmeisters”. These are those wonderful caped crusaders who will rescue a junior heading for share price oblivion. My clients hold 28% of one such company that has just undergone a transformation Michael Jackson would be proud of. Now from a fledging explorer with not enough money to drill another hole, we now are holding a rising QLD coal and energy company. It’s a fluke, off the side of the boot, and one I am not going to take credit for, although it is going to fund some of our future ventures.
⇒ The Australian gold sector has been annihilated. We have just had Monarch (MON) announce the closure of Davyhurst (stock suspended), and one of our large producers St Barbara Mines (SBM) undergo a heavily dilutive issue that has seen its share undergo a very nasty correction. This is all on top of previous high flying failures, escalating costs, an energy crisis in WA, and rock bottom sentiment despite a very healthy gold price in $A terms. Silver? Well forget it for now because in Australia not many give a toss.
⇒ So with coal, energy, phosphate, potassium/potash all the rage where too next?
THE NEXT SPECULATIVE BUBBLES
I am always looking ahead and like to accumulate large positions in great companies before they become famous. My current thinking is now that lithium, geothermal and gold is the place to be. Outside of the resources sector the biotech sector has been beaten up and kicked whilst on the ground, and is certainly worth having some exposure just in case.
Unfortunately my lithium favourite with its projects in Argentina has doubled in the last month, and as a result makes it harder for me to get more of my clients adequately set. Despite poor sentiment towards the gold sector there have been some early signs of an uptick in buying interest. We purchased 25% of a junior gold company early in the piece that has already provided numerous high-grade hits and subsequent rallies and is still emerging despite suffering a nasty breakdown over the last month. 8c to 85c (equiv with rights issue options) and back to 40c is not a total disaster but just indicates how these corrections can shake your confidence around.
Our other emerging gold producer is still being priced for absolute failure, so we are continuing to build a decent stake at stupid cheap prices. There are always clients that will phone up and complain about stocks such as this one that hasn’t moved in months, but there are also others who are taking profits from elsewhere and loading up. When a company is producing gold, making excellent profits and regional discoveries if the capital structure is still respectable it is not going to be sitting at 14.5c. The concept of growth and company transformation is a hard to grasp for many investors, and that’s why the bulk of speculators will fumble their way through their investment careers selling quality companies far too early.
There is a severe lack of viable investment opportunities in the Australian gold sector. Once sentiment shifts and with only a small increase in the participation rate it is going to be like trying to suck the world’s oceans through a drinking straw. The biggest threat I feel is having the Canadian and US majors come in and take it over for a song.
Gold is money, it can be traded 24 hours a day, exploration success with the drill bit is like walking into a bank vault with a shopping trolley. Investors are not yet comfortable with this concept, so we use it as an opportunity to accumulate gold assets on the cheap.
Taking my own advice (finally I have perfected the art), we have built a 10% stake in a geothermal junior that has a board of Directors and management team that oozes class and gives me the feeling that if the sector is indeed going to experience a “speculative bubble” the upside potential is staggering. I have presented this stock to others but most will not touch it because they don’t understand it. I have had numerous cases where they will not touch oil stocks because they have lost money in the past and have never had success so that is their justification for not having a go. Sure geothermal exploration can be hideously expensive and carries a high degree of risk, but that is where the real cheesecake is. The best bubbles are often ones that people don’t understand, and there is no spot trading price to throw them off. This is why phosphate/potash and to a lesser extent the iron ore sectors have done well in Australia.
In a speculative bubble I certainly do not everyone becoming an expert at least until the peak. They are not going to buy something for $5 per share that is clearly worth 10c if they can sit down with their Mrs, a cup of tea and come up with a DCF valuation on the company. Studies have shown that women make better investors than men, so best not to let them get too involved, otherwise markets will slowly become rational and this would be like watching a censored episode of Gordon Ramsay.
⇒ I must make it perfectly clear that I think charting and anything to do with technical analysis is a complete crock. Over the last ten years our greatest winners have come from stocks being belted into submission after apparently breaching support levels. This allows us to purchase these stocks quite easily without any competition as your TA specialist is nowhere in sight. If we ran stop losses we would have been stopped out of everything, and the only person making money would be me from the commission. The best stocks with all the upside potential are the ones you rarely read about on internet forums as the market has become so short-term and everyone is worried about being able to pay for their T+3 trade. I guess if I was aiming to attempt to make a living and had to be right 51% of the time they might be useful. Charts are there for everyone, yep they are self fulfilling prophecies like most things but I would much rather focus on becoming a niche player and giving my clients an advantage.
⇒ There has been an absolute explosion in derivatives. These are a great way for the issuer to make money and get the sheep in for another shearing. A bit like eating a strawberry tim tam or developing a cherry/vanilla/diet/zero caffeine free version of Coca Cola. The KISS method is the best approach, all these new systems, packages, trend trackers only create noise that is likely to tip you out of perfectly sound investments. It is a bit like trying to get out of the car dealership just before you are asked “Do you live near a beach?” and “Would you like full paint protection?”.
⇒ Owning a number of quality gold juniors. Look for fresh discoveries and assets that have not been regurgitated far too many times. Check the CV’s of those involved with the company. Those who have previously worked with the gold majors and developed real mines are the ones to back.
⇒ I am a fan of geothermal but it may not be for everyone. Conducting some research could be prudent and if the interest develops look for potential leaders in the sector rather than the bandwagon junkies.
⇒ Base metals are on the nose but you wouldn’t think so looking at the copper price. The key with these is management, and grade. Sure the market is pricing some stocks for oblivion but if the project has the goods and the Directors are not going to decimate the structure you are in with a chance.
⇒ Diamonds are very tough, and the number of profitable operations on the planet is very small but here lies the opportunity. People need to overcome their fear of difficult sectors and previous failures.
⇒ With booms comes the need for food and disease prevention and or/treatment. The biotech sector is worth a look and would provide the ultimate contrarian investment opportunity. When it comes to research similar rules apply to the resource companies, “Back the right people at the right price”.
⇒ Speaking of backing the right people, if often pays to, “Back the boffins” in the industry. These are not your slick promoter types (no grease in sight), these are the geoscientists, PhD’s and those likely to have been beaten up at high school. Boffin IPO’s are something to behold. There is often very few promoter shares issued, the companies are poorly promoted, struggle to find broker support and upon listing at 20c, often find themselves at 10c and friendless. These are my favourite types for buying low and buying lots. Often the heaviest selling is right at the bottom, and when they get a sniff of anything they can be elevated to rock star status. Boffin stocks normally contain board members with many years experience and access to valuable databases and at some stage in their listed lives are candidates to do something pretty special. Some list with walk up drill targets, others put shareholders to sleep with magnetic and gravity surveys and quote results in ppb or ppm. If one of these stocks was standing at the bar it would be the one dressed in the horrific black stockings, a red cardigan, and she would have bad breath, acne and facial hair. I have subjected my clients to plenty of these stocks and I can say that most of them do indeed undergo an extreme makeover. (Some of the most prolific multi-baggers on the ASX have been boffin IPO’s whose share prices have gone from 10c-12c to $2 to $3 and then some)
⇒ Somewhere out there is another major discovery waiting to happen. With this in mind it pays to follow the true professional explorers, their JV partners and the regions they are about to target. Some of these you can pick up for under 10c and trading at shell value. I often suggest that clients where possible should buy 100,000 shares in these just in case. The risk/reward profile is very attractive, as worst case you might lose a few thousand dollars (if you sell) but stand to make $50,000+ even if a hint of a discovery is made. Often these companies have plenty of friends with deep pockets, and they will continue to make small placements until something turns in their favour.
“ I am still astounded that buying a junior explorer capped at $3m with $2m in the bank and strong management can be considered riskier than buying a financial institution riddled with debt”.
I guess that blue chip stocks and property never fall in value so what would I know?
I have become so cynical at the amount of BS out there that I am going to need a cone of silence or my own bubble to operate in. I admit my own office would be nice, but pitching in an open plan office is kind of fun even when our market is being belted into oblivion. I just love the social aspect of my job, even if this means I tend to shun the party scene in favour for sitting in front of the TV watching quality TV.
The beauty of the market is that’s it horse for courses. I am out there looking for the next batch of ten-baggers, others are looking skyward to hopefully catch a glimpse of “Yield Man” that is hopefully coming to save the day. I am not saying that there is anything completely wrong with being conservative and following everyone else (this strategy works well in property/financial bull markets), but when it comes to regret studies they have shown that the one real thing people truly regret (when their lives are nearing the end) is not TAKING MORE RISK.
The stock standard lotto player over a 30 year period could plow upwards of $100,000 into something where the odds are 55 million to one of winning, yet firmly believe they are conservative and refuse point blank to buy a gold or oil stock. I would much prefer to put my money on a monkey with a packet of darts and the mining/oil page to throw them at. Ideally now is the perfect time for the darts to be thrown.
Best of luck to everyone!
Personal Disclosure: I have personal holdings in speculative shares in gold, silver, base metals and industrial sectors and may at times liquidate or increase these holdings as I see fit. My clients have considerable investments in a number of companies and may rotate these holdings when required. My son now owns shares in Ramelius (RMS), Diamonex (DON) and shortly Panax Geothermal (PAX). He is only 9 weeks old and these investments are not to be treated as short-term.
Disclaimer: The opinions contained in this article are purely my own and any prior to any investment decision you should contact a licensed financial adviser. Speculative shares are volatile, should be considered high risk and can result in significant financial losses. I earn fees from trading and raising funds for junior resource companies.
About the Author: I am an advisor to hundreds of small to medium investors in the speculative sector of the market and have been since November 1998. In 2001 I wrote "The Green Room" A Guide to Speculating on the Australian Stock Market and have run a number of presentations. I am currently writing my second book and it should be ready for publication in early to mid 2009. I have a small number of books left and am happy to send these out to prospective clients free of charge.
If you would like further information or are interested in becoming a client I can be contacted at email@example.com. I have just taken on an Associate Advisor and am now able to take on new clients.
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